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March 2015

Share purchase agreement: validity of earn-out notice

In a recent case the Court of Appeal found that a notice setting out the buyer's calculation of the earn-out consideration due under a share purchase agreement was invalidated because the buyer had failed to comply with the requirements of the agreement when calculating the earn-out specified in the notice.

The share purchase agreement required the buyer to carry out the initial calculation of the earn-out consideration and to provide notice of that calculation to the sellers by a specified date. The earn-out was to be calculated by reference to the pre-tax profits of the acquired companies as shown in their audited accounts for a specified period. Following completion, the buyer changed the accounting reference date of the acquired companies, so that the audited accounts required by the share purchase agreement were not available when the earn-out fell to be calculated. As a result, the earn-out specified in the buyer's notice was based on the audited consolidated accounts of the buyer's group for a different period, and otherwise upon the management accounts of the acquired companies.

The Court of Appeal held that the requirement for the earn-out to be calculated by reference to the audited accounts that were specified in the share purchase agreement was a form of contractual protection of real importance to the sellers rather than a mere formality. There was a boundary between errors in the nature of a mathematical error which would not invalidate an earn-out notice, and substantial departures from the applicable contractual provisions, which would. The court considered that the wholly non-compliant basis upon which the buyer had presented the earn-out notice was plainly on the invalidity side of that line.

TUPE service provision change: single employee was an organised grouping

The Court of Appeal has held that a commercial property manager, who was solely responsible for managing a group of Dutch properties for a client, was an "organised grouping of employees" for the purposes of regulation 3(3)(a)(i) of the TUPE regulations. Although she worked alone, she was effectively a one-person department and the employer had deliberately allocated her to the Dutch properties. Accordingly, when the management of the client's entire portfolio was transferred to a subsidiary of the owner, there was a service provision change and the property manager transferred to the subsidiary. The fact that she had, in the past, assumed some responsibility for other properties did not undermine this, as she had always devoted the majority of her time to the Dutch properties, and so the "principal purpose" test was satisfied.

Changing staff handbook terms

The High Court has held that the Department for Transport (DfT) was not entitled to unilaterally change the terms of its staff handbook, which the court found had been incorporated (in part) into its employees' contracts of employment. Specifically, the DfT was trying to introduce a new standard "trigger point" across its various agencies in relation to the number of absences required before an official absence management process was initialised. The court found that the current trigger point was incorporated into the employees' contracts of employment, and that therefore the DfT could only make changes to it if, in accordance with the handbook's variation provisions, that change was not detrimental. The court held that the suggested change was, in fact, detrimental to the employees, and made a declaration that reinstated the employees' original contractual terms.

Employee shareholder shares: BIS statement

HMRC has published a document which states that the Department for Business Innovation and Skills (BIS) has confirmed that companies may use existing shares, rather than having to issue new shares, when setting up employee shareholder arrangements. BIS has apparently confirmed that existing shares can be used to satisfy the requirement in section 205A of the Employment Rights Act 1996, that companies "issue or allot" shares with a value of at least £2,000 to an employee shareholder. However, any such shares must be paid up and no other consideration must be provided for these shares.

BIS has not yet published anything itself on this point or indicated if it intends to update its existing guidance on employee shareholders. However, it is not clear how the use of existing shares would fall within the requirement in section 205A of the Employment Rights Act 1996 that companies "issue or allot" shares to employee shareholders.

Mode of acceptance of a contract

The High Court has held that the wording of a signature block and other wording in a draft contract for the supply of cotton did not constitute a prescribed mode of acceptance. Draft contracts contained a signature block which included the words "accepted [buyer]" and a requirement that the buyer return a signed copy. The buyer did not sign the contracts, but did convey numerous instructions to the seller, asking it to set the purchase price of the cotton, in accordance with the contract, which the seller did. The buyer argued that there was a method for communicating acceptance specified by the contracts and consequently there was no valid acceptance of the seller's offers and no contract was formed.

Applying a previous case, the judge held that the presence of the word "accepted" above the space for signature combined with the reference to the signed copy to be returned did not "introduce either prescription or conditionality". Also, having a prescribed mode of acceptance is for the benefit of the offeror and he is therefore entitled to waive those requirements. The buyer's operation of the price fixation mechanism was an unequivocal acceptance of the offer. The judge added that even if the buyer's acceptance was not in the prescribed form, the seller had unequivocally waived that requirement by sending the fixation confirmations. He also added that if the buyer's price fixation instructions were ineffective as an acceptance of the contract terms, the seller was entitled to treat them as a counter-offer to contract on those terms, which it accepted by confirming the price fixations.
This case is a useful reminder that contract terms can be accepted by conduct, even if the party has not signed the contract.

Interpretation of notice provisions in contracts

The High Court has considered the application of a formal notice provision to a termination clause. Ticket2Final (T2F) and Wigan Athletic AFC (Wigan) entered into an agreement where in return for a substantial fee, T2F would receive advertising opportunities and be able to sell ticket options for future Wigan games. In the agreement, Wigan agreed that it was within its power and authority to perform its contractual obligations, which included the supply of the tickets to T2F. Wigan failed to provide the tickets and T2F claimed for breach of contract and also for misrepresentation. The judge held that Wigan was in breach of contract and that it had also misrepresented its ability to supply those tickets.

But of interest is the judge's consideration of the termination provisions. Wigan had also purported to terminate the contract for late payments by T2F. The contract entitled Wigan to terminate if T2F failed to pay any sums due and the sums remained outstanding for seven days following notice. The contract contained a formal notice clause requiring notices to be given in a prescribed manner. Wigan failed to comply with the requirements of the formal notice clause when it demanded payment before termination. Wigan argued that the formal notice clause did not apply to a notice demanding payment before termination and also that there was an implied term arising from the parties' conduct that formal notices could be given by email. The judge disagreed and held that the formal notice clause did apply to the notice demanding payment before termination. He said that the purpose of having a formal notice clause is to ensure that significant notices, such as those which if not complied with might lead to termination, are served in the prescribed manner so that "the recipient can be in no doubt about their importance."

This case highlights the importance of ensuring proper compliance with contractually agreed notice provisions and expressly providing for notices by email in a contract, if desired.

Liability for business rates where property undergoing refurbishment

The Court of Appeal has held that a property that had been undergoing internal refurbishment was not exempt from business rates. On the valuation date, various major building elements had been removed. These included the air conditioning system, electrical wiring, sanitary fittings and most of the ceiling tiles.
The Local Government Finance Act 1988 (LGFA 1988) provides that, where non-domestic property is vacant, the rateable value of the property is based on the amount of annual rent reasonably obtainable for the property, on the assumption that before the tenancy commences the property is in a state of reasonable repair, but excluding any repairs that a reasonable landlord would consider to be uneconomic.

In assessing the situation as at the valuation date, the court held that, on the facts, the property could be put back economically into its former state of repair. In determining this, it was irrelevant whether a ratepayer intended to create a different kind of property ultimately, or that the scheme of works would result in such a property.

When ascertaining whether works constituted repair works, it was necessary to compare the property in its actual state with its previous state. The court held that, on the facts, replacement of the stripped out elements (none of which was structural) were repairs, as they required replacement of subsidiary parts of a whole.

Those who own vacant non-domestic premises that are undergoing refurbishment (and their advisers) will find this judgment interesting. They should not assume automatically that their properties will be assessed at a nominal rateable value.

This judgment aims to clarify the meaning of "repairs" and notes that certain aspects of the Valuation Office Agency's Rating Manual are misleading. Whether the work required to put property into repair can be fairly described as "repairs", and whether it is economic, will depend upon the particular facts. Following this decision, property owners may find it more difficult to argue that their properties should be exempt from business rates.

Insurance Bill receives Royal Assent

On 12 February 2015, the Insurance Bill, which was introduced into Parliament on 17 July 2014, received Royal Assent, and is now known as the Insurance Act 2015.

The explanatory notes on the Insurance Bill, as brought from the House of Lords on 15 January 2015, state that its purpose was to update the statutory framework in the following areas, in line with best practice in the modern UK insurance market:

Disclosure and misrepresentation in business and other non-consumer insurance contracts: The Act amends the duty on business policyholders to disclose risk information to insurers before entering into an insurance contract, introducing a duty of "fair presentation" of the risk. It also provides the insurer with a number of proportionate remedies when the duty is breached.

Insurance warranties and other terms: The Act abolishes "basis of the contract" clauses (which have the effect of converting pre-contractual information supplied to insurers into warranties). It also provides that, if there is a breach of warranty, the insurer's liability should be suspended, rather than discharged, so that insurance coverage is restored after a breach has been remedied. Finally, it provides that breach of a warranty or similar term should not allow an insurer to refuse to pay a claim if the insured shows that the breach was completely irrelevant to the loss suffered.

Insurers' remedies for fraudulent claims: The Act sets out clear remedies for when a policyholder submits a fraudulent claim.

The Act also amends the Third Parties (Rights against Insurers) Act 2010 (which has not yet been brought into force), clearing the way for the 2010 Act to come into force.The provisions on insurance contract law will come into force in August 2016.